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Telekom Austria Group shows a revenue growth by 7.7 percent year-on-year to EUR 2.536 billion for the first six months of this year which is driven by continued growth of international mobile revenues and the consolidation of Belarusian mobile operator Velcom. Its operating income falls 4.9% to EUR 389.9 million due to higher depreciation and amortization charges, and the net profit dropped 18.6% to EUR 226.0 million due to higher interest expenses mainly as a result of the acquisition of Velcom. Due to the inclusion of Velcom and the launch of Vip mobile in Serbia and Vip operator in Macedonia during the fourth quarter of 2007, mobile subscriber base grew by 52.5 percent year-on-year to 16.5 million. Mobile Communication segment, revenues and EBITDA are expected to grow by about 10 percent due to strong international operations, primarily driven by the consolidation of Velcom in Belarus as well as improving results from the start-up operations in Serbia and Macedonia.

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Operator still eyeing Bosnian mobile market in 2008, but insists there are ‘no concrete plans’ for expansion.
The biggest threat to Telekom Austria’s financial performance is fixed-line migration in its home market, which is impacting the growth it is enjoying at its Eastern European mobile subsidiaries, said the operator’s CEO Boris Nemsic Thursday.  

Reporting its 2007 financial results yesterday, the operator said fierce competition in the Austrian mobile sector had led to declines in prices and accelerated fixed-mobile substitution.

“It’s a very simple calculation. If we lose 200,000 fixed-line connections, that’s 200,000 multiplied by the fee multiplied by 12 months,” Nemsic.

“These declines, plus the interest on its acquisition costs for Belarus-based MDC, mean that Telekom Austria said it expects a 12% decline in net income for 2008, with modest revenue and EBITDA increases of 5% and 3% respectively, helped by growth in its international operations.

Still, Nemsic said he was encouraged by the financial performance of the company over the course of 2007, given the number of subsidiaries and greenfield deployments it has undertaken.

“2007 was the biggest year of expansion in the history of the company… We’ve raised our customer base by over 50%, doubled the number of addressable markets to eight, and increased the number of addressable consumers to 44 million,” he said.

According to the telco’s full-year results, it now has a total of 15.4 million subscribers across its entire base of operations.

In 2007 Telekom Austria began operating mobile services in Serbia and Macedonia, and in Belarus following its October acquisition of local operator MDC, all of which Nemsic said have performed in line with expectations.

“After six months of operations in Serbia we had over 500,000 subscribers, we launched a post-pay tariff and began selling BlackBerrys… With MDC we managed to consolidate the company in one quarter,” he added.

However, in a report from Dow Jones Newswires, Citigroup Wednesday warned that Telekom Austria’s dependency on emerging markets leaves it more exposed to investor changes in risk appetite than most peers.

“I don’t see it as a risk I see it as an opportunity,” said Nemsic Thursday.

“We have higher operating margins in emerging markets than we do in Austria where the competition is more fierce,” he commented.

Still, for 2008 Telekom Austria has no solid plans to expand into other countries, but at the same time Nemsic reiterated he is keeping a close watch on the Bosnian mobile market.

“We’re not excluding anything but it needs to be a profit and a growth opportunity for us to consider it,” he said.

In November the company’s CFO Hans Tschuden said Telekom Austria was closely monitoring the proposed privatisation of one of Bosnia’s three mobile operators BH Telekom.

“Two of Bosnia’s three mobile operators have been almost wholly privatised, the third one, BH Telekom, is starting to be privatised and we are watching that closely,” said Nemsic on Thursday.

“It’s a difficult one because Bosnia has a complex decision-making process, so we’re watching to see how it pans out,” he said.

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Telekom Austria wins an average of 1,000 new customers per week for its IPTV service aonTV and plans to expand aonTV coverage to 50 percent of all Austrian households by the end of 2008. Telekom Austria also announced a cooperation agreement with On Demand Deutschland to enhance its IPTV Video on Demand service aonTV Videothek with more than 500 movies by the end of this year. At the same a lot of Hollywood blockbusters will become available in HDTV format. The operator also plans to expand aonTV’s portfolio to around 100 TV channels by the end of the year including Turkish TV channel TRT, Serbian TV channel RTS Sat PTC and the Croatian channel HRT. The monthly fee for aonTv will stay EUR 4.90 in combination with an aonPur or aonBlizz connection.

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Telekom Austria Group announces that the number of fixed net access lines fell to 2.4 million at end-2007, from 2.6 million at end-2006, as the fixed-to-mobile migration continued. The Fixed Network division added 28,600 net xDSL customers in Q4 2007, compared to 23,700 customers added in Q4 2006, to reach a total of 750,600 at end-2007, compared to 693,600 at end-2006. The group boosted its mobile customers by 44.6 percent to 14.8 million in 2007, boosted by the contribution of the recently-acquired MDC in Belarus and positive development across all countries. Excluding MDC, group mobile customers reached 11.7 million in 2007, up by 14.7 percent from 2006, with 510,700 net additions in Q4, compared to 454,000 net additions in Q4 2006. Mobilkom Austria added 105,600 net mobile customers in Q4, compared to 101,100 added in Q4 2006, to end with 3.96 million customers, up by 9.1 percent from end-2006. Mobilkom Austria boosted its market share to 40.3 percent at end-2007, from 38.7 percent at end-2006.

Mobiltel in Bulgaria added 284,900 net mobile subscribers in Q4 2007, versus 231,600 net additions in Q4 2006, to end with 5.1 million customers, up 19.5 percent from end-2006. Its market share fell from 52.5 percent in 2006 to 50.3 percent in 2007 in the face of stiff competition. MDC in Belarus had 3.06 million customers at end-2007, up 23 percent from end-2006, for a market share of 43.4 percent. Croatian mobile operator Vipnet ended 2007 with 2.18 million customers, up 14 percent from 2006, adding 102,600 net subscribers in Q4, compared to 106,700 net additions in Q4 2006. Vipnet’s market share was 43 percent at end-2007. Si.mobil in Slovenia had 497,200 mobile customers at end-2007, up 18.2 percent year-on-year, adding 17,400 net customers in Q4, compared to 15,000 net additions in Q4 2006. Its market share was 26.9 percent at end-2007.

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Tele2 Austria partners with 3 Austria to offer a package including mobile telephony, fixed telephony and broadband services. The package is called Complete Home & Go and includes a 8 Mbps DSL connection via Tele2’s Austrian network plus telephony line, WLAN router, a 3 data card plus 3Data Fix subscription for EUR 29.90 per month. Customers who sign up before 26 January of this year pay EUR 9.90 per month during the first three months of their contract. For new customers who sign up after 26 January, the monthly fee is EUR 19.90 during the first three months. The Tele2 8 Mbps DSL connection has a maximum upload speed of 1 Mbps and 3Data Fix includes 300 Mb data volume. This partnership marks the return of Tele2 on the Austrian mobile market, after it sold its mobile customer base to Telekom Austria in the autumn of 2007.

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Telekom Austria Group has closed the acquisition of a 70 percent stake in Cypriot, the sole owner of the Belarusian mobile operator MDC, for an enterprise value of approximately EUR 730 million after having received the approval of relevant antitrust authorities. MDC will be fully consolidated into the mobile communication segment of the Telekom Austria Group from 1 October of this year and will positively impact revenues and EBITDA of Telekom Austria Group for the full year 2007. In October, Telekom Austria Group reached an agreement to acquire the stake from Mr. Ead Samawi and his partners, entered into a call and put option agreement related to the remaining 30 percent stake held by Mr. Samawi and his partners exercisable in the fourth quarter 2010 for approximately EUR 320 million and furthermore agreed on a performance based deferred consideration. The amount of the deferred consideration, which is payable in the fourth quarter 2010, will be directly linked to the future financial performance of MDC. Following the acquisition, the management team of MDC will be strengthened by Helmut Duhs as CEO and CFO of SB Telecom in charge of MDC. Helmut Duhs will head a team of Belarusian experts with deep knowledge of the Belarusian market and Austrian professionals with extensive experience in Telekom Austria Group and its international subsidiaries.

Vipnet looks to capitalise on low fixed broadband penetration with FMS products; competition in mobile space intensifies as pricing pressures bite.
Croatia’s stunted fixed-line and broadband market plus a highly developed mobile space equals a significant opportunity for the country’s mobile players.
And Croatia’s second largest mobile operator, Telekom Austria-owned Vipnet, has its sights firmly set on poaching fixed minutes and data customers.

“We see a big chance for Vipnet to enter with mobile broadband products,” said Marie-Helene Magenschab, CEO of Vipnet, speaking at a Telekom Austria press event in Vienna last week.

According to Vipnet, fixed broadband penetration in Croatia stands at just 8.3%, largely as a result of a “very monopolistic market situation”; incumbent operator T-Com (Deutsche Telekom acquired a controlling stake in Hrvatski Telekom in 2001) holds fixed-line market share of over 95%.

By contrast, “the mobile market is very well developed,” said Magenschab, which means mobile players are looking towards fixed-mobile substitution and mobile data products to expand their businesses.

A key product for Vipnet is its Homebox, sourced from partner Vodafone, which it brought to market in the fourth quarter of last year.

“[Homebox is] a clear fixed substitution product for people who want to keep their fixed number,” said Magenschab.

The device enables customers to retain their fixed phone number, or to have a new “fixed” number, without having a fixed line. Users plug their fixed-line phone, and a PC if they so desire, into the Homebox, which routes calls over the mobile network.

Vipnet also offers Vodafone’s Connect Cards for laptop users and in March 2007, offering speeds of up to 7.2 Mbps on HSDPA.

Most people in Croatia have dial-up internet access, Magenschab explained. “If you provide them with EDGE they are quite impressed.”

Vipnet’s EDGE network is available to over 90% of the population, while customers in urban areas have access to 7.2-Mbps HSDPA “to compete with ADSL”, Magenschab said. Furthermore, “we are very quick,” she added. It can take several months to get an ADSL connection installed.

Thanks to these products and services, “the data traffic took off,” said Magenschab. And Vipnet has seen an “increase in the data users of almost 400%.”

As of June 2007, the mobile networks accounted for 40% of all minutes in Croatia, up from 31% a year earlier.

But competition in the mobile space is strong. Vipnet shares the market with leading player T-Mobile – the pair command shares of 42.7% and 47% respectively, according to Vipnet - and Tele2’s local unit. Tele2 was the last to come to market when it launched just over two years ago, and it has since built up a share of more than 10% of the market, although Vipnet insists that it has gained this market share largely at the expense of T-Mobile.

Croatia’s SIM penetration stands at 107%, driven by high pre-paid usage, although real user penetration is approximately 76%, Magenschab said. 80% of the market is pre-paid.

“Post-paid is [not necessarily] always the better option,” Magenschab said, since operators have fraud and non-payment of bills to contend with. Tele2 heavily pushed its post-paid offerings, she added. “They have a severe bad debt problem now.”

Nonetheless, Vipnet is pushing its own post-paid offers now, albeit carefully, as it seeks to boost ARPU. “Prices are dropping,” Magenschab admitted.

Pricing pressures could be exacerbated if mobile virtual network operators begin operating in Croatia. “There are a lot of MVNOs trying to enter the market,” but none have been successful so far, said Magenschab. “We hope to keep it like that.”

Like parent company Telekom Austria, VIP has launched a low-cost brand, the interestingly named Tomato, to address the cut price end of the market, rather than compromising its main brand. “[Our brand] is the basis for success,” Magenschab said.

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Telekom Austria CEO hits out at regulatory situation; sees further consolidation, including likely acquisition of mobile operator 3.
Intense competition in the mobile space and a scatter gun approach to regulation have caused chaos in the Austrian telecoms market, Telekom Austria group CEO Boris Nemsic said this week.
“I consider Austria… like a zoo. There is a fence around, then you throw meat inside and the animals are fighting, fighting, fighting,” Nemsic told journalists at a press event in Vienna on Monday.

The country has four GSM networks, six UMTS networks, and a slew of resellers and MVNOs, Nemsic reminded his audience. “It’s just an overkill on capacity,” he said.

In addition, fierce price pressures have pushed the cost of mobile voice minutes below that of fixed minutes.

In the fixed-line space Telekom Austria retains a market share of 57%, but compared with other European markets, calls are migrating to mobile at an alarming rate. A massive 70% of voice traffic in Austria is carried by the mobile operators. Of the remaining 30% on the fixed network, Telekom Austria claims a share of 18 percentage points.

“We are losing traffic, we are losing volumes and therefore also revenues in our core business,” admitted Rudolf Fischer, deputy CEO of the Telekom Austria group. Telekom Austria is losing 20,000 lines per month. “Two thirds of that is going to mobile-only, and approximately one third into the unbundlers,” he said.

However, Nemsic remains optimistic about Telekom Austria’s future, and that of mobile unit mobilkom.

“We are the market leaders and we know how to make the others suffer,” he said.

In mobile, “the growth comes from the data segment,” Nemsic added, noting that mobile voice volumes are growing, but flat-rate tariffs mean there is little impact on revenues.

“HSPA is definitely the focus we have and we are selling data cards and megabytes like hell,” the CEO said.

Regulatory ructions
The regulatory regime in Austria is not making life easy for the incumbent, and its outspoken CEO is equally unimpressed with regulatory moves at EU level, instigated “by a specific Commissioner Reding.”

“The overall view of the telecoms space in Europe is not consistent,” Nemsic told Total Telecom later in the day, noting that regulators have so far targeted low-hanging fruit, roaming rates being a prime example.

“[Austria was one of the] most hit by EU regulation of roaming fees,” he said.

The one-size-fits-all approach that comes with regulation at European level is like “comparing apples and pies,” Nemsic added.

Within Austria the situation is no better for the incumbent, which is effectively barred from offering converged fixed and mobile services as heavy regulation would make any such offers unviable.

The fixed-line and fixed broadband markets are heavily regulated, but the mobile side, which now claims the bulk of traffic, “is not regulated at all”, Nemsic explained. The regulator is focused on protecting alternative fixed-line players, he went on, but the real competition is between fixed and mobile.

“We are not playing with the same cards. We are in the same courtyard but we are not playing the same games,” said Nemsic.

Furthermore, Nemsic bemoaned the fact that the Austrian regulator refuses to take into account anything that happens outside Austrian borders.

“They are telling me I am bigger than T-Mobile,” he said, alluding to the fact that the German operator has the backing of a significantly larger group outside of Austria.

More consolidation to come
T-Mobile’s move to buy rival mobile operator Tele.ring was the first real move towards much-needed consolidation in Austria, but according to Telekom Austria the effects of this deal have yet to felt.

Indeed, T-Mobile has retained the Tele.ring brand and is using it as a discount brand to serve the lower end of the market.

“They belong to the same company and they didn’t notice yet,” Nemsic quipped. However, this is a strategy mobilkom has also adopted.

The operator launched its own low-cost brand BOB in mid-2006, to enable it to serve the cheaper end of the market without compromising its A1 brand.

Most believe that the T-Mobile/Tele.ring tie-up will be just the start of mobile consolidation in Austria.

“We will see [more consolidation,” said Hans Tschuden, Telekom Austria’s chief financial officer. “For three [network operators] there is a basis to survive. For four, definitely not.”

Hutchison Whampoa’s 3, which has a market share of just 5% in Austria, is a prime candidate for takeover.

“It’s a matter of time until they exit that market,” predicted Tschuden.

Meanwhile, the CEO did not rule out the possibility of a merger between mobilkom and 3 Austria. From a regulatory point of view, “[mobilkom would be] excluded from taking over a major partner,” he said cryptically.

Nemsic added that 3’s presence in the market came about somewhat by chance.

“Austria happened to them. It was not intentional,” he said. There were six offers for six UMTS licences. “They could not withdraw.”

Nemsic also believes the future is bleak for mobile service providers without their own networks.

MVNOs have no chance, he said.

Indeed, earlier this month Telekom Austria agreed to acquire the 130,000-strong Austrian mobile subscriber base of Scandinavian MVNO Tele2. 

“We paid €7 million for it, which is… a fair price,” said Nemsic.

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Tele2 Russia has bought Telecom Eurasia from regional operator Smarts as part of the company’s continued expansion in Russia. Tele2 will pay in cash approximately SEK 160 million on a cash and debt free basis. Telecom Eurasia operates an 1800 MHz GSM licence in the region of Krasnodar with a population of 5.1 million. Krasnodar borders Rostov, which is one of the most successful regions of Tele2 Russia, according to the company. The current customer base is 20,000. The acquired company will be integrated into Tele2’s existing operations. This month, Tele2 announced it has sold its Spanish and Italian units to Vodafone and its Austrian MVNO operations to Telekom Austria.

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Telekom Austria Group has agreed to acquire a 70 percent stake in Cypriot SB Telecom from Ead Samawi and his partners for an enterprise value of EUR 730 million. SB Telecom is the sole owner of the Belarusian mobile operator MDC. Furthermore, Telekom Austria has entered into a call and put option agreement on the remaining 30 percent stake, exercisable in the fourth quarter 2010 for EUR 320 million. Samawi will remain chairman of SB Telecom, while all executive management positions in SB Telecom and MDC will be nominated by Telekom Austria, which will have full operational control.

Telekom Austria has also agreed on a performance-based deferred consideration. The amount of the deferred consideration, which is payable in the fourth quarter 2010, will be directly linked to the future financial performance of MDC and may increase the enterprise value to 6.5×10E EBITDA. In return, the Telekom Austria has full access to the free cash flow and dividend distributed. MDC, which markets its mobile communication services under the brand names Velcom for postpaid services and Privet for prepaid services, is the number-two operator in Belarus, with a market share of approximately 42 percent and more than 2.7 million customers. The Belarus market had a mobile penetration of 66 percent as of 30 June. The acquisition of the 70 percent stake in SB Telecom will be financed using existing credit facilities, and Telekom Austria expects the deal to add to earnings per share from 2008. It will have no impact on the company’s stated dividend policy of distributing 65 percent of net income.

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